KOREA, SOUTH

Photo by: Andrey Shchekalev

Republic of Korea

Taehan Min-guk

COUNTRY OVERVIEW

LOCATION AND SIZE.

South Korea occupies the southern half of the Korean Peninsula in
eastern Asia. It is bordered by North Korea to the north, the Sea of
Japan / East Sea to the south and to the east, and the Yellow Sea to the
west. South Korea has an area of 98,480 square kilometers (38,023 square
miles), which makes it slightly larger than the state of Indiana. It has
238 kilometers (148 miles) of land borders with North Korea and 2,413
kilometers (1,499 miles) of coastline. Among its major cities, Seoul,
the capital city, and Inchon are located in the northwestern part of the
country, while Kwangju and Pusan are in the south, Taegu is in the
southeast, and Taejon is in the center.

POPULATION.

The population of South Korea was estimated at 47,470,969 in July 2000.
It increased from 35.3 million in 1975 to 46.1 million in 1998,
indicating a growth rate of 1.2 percent. At the current estimated growth
rate of 0.6 percent, the population will increase to 51.1 million by
2015. In 2000 the estimated birth rate was 15.12 per 1,000 population
while the estimated death rate was 5.85 per 1,000 population. The
estimated migration rate was 0 percent.

South Korea's population is ethnically homogeneous. With the
exception of a small Chinese community of about 20,000, the rest of the
population are ethnic Koreans. Some 78 percent of the population falls
within the age groups of 15-64 (71 percent) and 65 or older (7 percent).
By 2015, 10.6 percent of the population will be older than 65.

South Korea is a highly urbanized society. In 1998, about 84.5 percent
of its population lived in urban areas, a significant increase from 1975
when the urban population accounted for 48 percent of the total. The
urban population is estimated to reach 92.2 percent by 2015. Seoul, the
capital city, is the largest urban area, with a population of 10.4
million, followed by Pusan (3.9 million), Taegu (2.5 million), Inchon
(2.5 million), Kwangju (1.3 million), and Taejon (1.3 million).

TAXATION.

South Korea's tax system relies heavily on
indirect taxes
, which account for about 50 percent of tax revenue. Resident and
non-resident individuals and corporations are liable for taxation.
Real-estate rental income, business income, earned income, temporary
property income, and miscellaneous income attributed to a resident are
taxed progressively. Interests and dividends are subject to withholding
tax. Non-residents are also taxed on income from sources in Korea. Tax
rates on individual income range from 10 percent to 40 percent. Taxation
applies to all corporations operating in South Korea, whether domestic
or foreign. Companies that have been incorporated in Korea are
considered to be domestic corporations and are liable for taxation on
their worldwide income, whereas foreign corporations pay taxes on their
Korean-generated income only. The corporate
income-tax
rates range between 16 percent and 28 percent.

Taxes, customs
duties
, and other government-generated revenues (assorted fees, social
security contributions, and the income of public enterprises) are the
main sources of government revenue.
Budget deficits
are financed through borrowing, either directly from domestic and
foreign banks or through the issuance of bonds. In 1999, total
government revenue was US$90.78 billion, of which all taxes and custom
duties accounted for 70.1 percent of the revenue. Other government
revenues accounted for 29.9 percent of the total revenue. The government
spent a total of US$101.77 billion that year and incurred a deficit of
US$10.99 billion. Better economic performance in 2000 resulted in a
small surplus (about US$11 billion). Of the total revenue of US$118.18
billion, all taxes and customs duties accounted for 69.48 percent
(US$82.12 billion) of the revenue, while other government revenues
accounted for 30.52 percent (US$36.06 billion).

AGRICULTURE

FARMING.

Arable land is limited in South Korea. It accounts for 21 percent of the
total land (20.7 million hectares), a decrease from its share of 21.8
percent (21.6 million hectares) in the early 1950s. Growing urbanization
and road building are the 2 major factors responsible for the decrease.
Agriculture's share of GDP, including forestry and fishery, has
declined from 6.2 percent in 1995 to 5 percent in 1999. The total output
of the sector, including forestry and fishery, grew 4.7 percent in 1999,
after a contraction of 6.6 percent in 1998 as a result of the 1997
financial crisis. In 1999, its share of the workforce was 10.09 percent
(2,349,000 workers), a decrease from 1995 when its share was about 12.2
percent (2,534,000).

Since the 1950s, South Korea has a well-developed and highly productive
agricultural sector, thanks to several factors: government financial
assistance (US$8.3 billion in 2000), mechanization, and extensive use of
fertilizers. To encourage growth and make the country self-sufficient in
its major food item, rice, the government has prohibited rice imports
under normal circumstances. It has also paid farmers higher than the
world price for their rice while subsidizing consumers to make rice
affordable for all. As a result, South Korea is now self-sufficient in
rice production and the production of many kinds of fruit and
vegetables. In 1999, rice production was 5,975,000 metric tons, a large
increase from 1995 (5,060,000 metric tons). South Korea also produces
significant amounts of other major items such as barley and wheat
(189,000 metric tons in 1999), but it is not self-sufficient in grains.
Therefore, it imports agricultural products, mainly cereals and
preparations, equal to US$1.716 billion in 1998.

FORESTRY.

Although forests account for 65.7 percent of its total land, the
topography makes commercial forestry difficult, so South Korea imports
most of its forestry products (timber), mainly from Indonesia and
Malaysia. Beginning in the 1950s, the reforestation policy of the
government, combined with the rural development program
of the 1970s known as the Saemaul Movement, has restored forests, which
were massively destroyed during World War II. This resulted in a large
increase in the production of timber from 30.8 million cubic meters in
1954 to 363.6 million cubic meters in 1998, mostly used by rural
inhabitants as fuel. For its various needs, the country relies heavily
on imported timber, which amounted to US$1.886 billion in 1998.

FISHERIES.

The fishing industry has been declining over the last 2 decades, with
only 315,000 people so employed in 1999, down from 750,000 in the 1970s.
Its role in the economy has declined along with that of agriculture in
general as a result of industrialization and the growth of the service
sector. In 1999, fishery products accounted for about 1 percent of
exports (about US$1.4 billion), a sharp decline from its share of 5
percent in the 1970s. South Korea relies on large imports of fishery
products for domestic consumption, although catches increased from 2.4
million metric tons in the late 1970s to 3 million metric tons in the
late 1990s. The value of imported fishery products was about US$1
billion in 1996-97, a huge jump from the mid-1970s when they were less
than US$20 million annually.

MINING.

Mining and quarrying are very insignificant economic activities,
accounting for only 0.4 percent of GDP (US$1.47 billion) in 1999. South
Korea has few significant mineral resources, and no oil or natural gas.
Its available minerals are lead, zinc, and copper, which supply only a
fraction of its needs. As a result, it imports all its needs in fuel and
almost all its needed minerals, accounting for 50.8 percent of its total
imports in 1999. South Korea was once a major exporter of tungsten
concentrate, but its output of tungsten ore stopped completely in 1993
when China flooded the world markets with tungsten, sharply decreasing
its world prices. The mining industry, including quarrying, grew by 5.2
percent in 1999, a negligible growth for an industry that experienced a
24 percent contraction in 1998.

MANUFACTURING.

Manufacturing has been the engine of growth and development for South
Korea, which has emerged as a major supplier of various manufactured
products. The sector's contribution to GDP was 31.8 percent in
1999, an increase from 30.9 percent in 1998 and an improvement over the
levels during the economic slowdown of 1996 and 1997.

South Korea's manufacturing sector produces a wide range of
labor-and capital-intensive products to satisfy domestic needs, but
mainly for export. They include light and consumer products (fabrics and
clothing); electronic, telecommunication, and computer devices; and
heavy industrial products (metals, automobiles, and ships). Since the
1970s, South Korea has become one of the world's major steel
producers. The automobile industry began growing in the 1980s for export
purposes only, but it eventually expanded to meet domestic demands too.
Annual production of automobiles grew from 935,271 in 1990 to 2.2
million in 1999.

The value of South Korea's manufactured goods was US$129.5
billion in 1999, as compared to US$97.9 billion in 1998 during the
economic crisis. The best-performing sectors included
telecommunications, electronics, industrial machinery, and transport
equipment, which grew by more than 30 percent. Heavy industry and
chemicals grew by 25.9 percent, and light industry (textile, footwear
and food products) by 7.2 percent.

During the financial crisis of 1997, many manufacturers, including large
conglomerates, went bankrupt. Corporate restructuring, as part of the
conditions for receiving IMF aid, has changed the ownership structure of
manufacturing to some extent. This previously closed sector is now open
to unlimited investment and acquisition by foreign investors. In 1998
Hyundai Motor, the largest South Korean automaker, acquired the troubled
Kia Motors, South Korea's third largest carmaker and its
affiliate, Asia Motors. In 2000, Renault, a French automaker, purchased
the bankrupt Samsung Motors while Ford, a U.S. company, bought the
bankrupt Daewoo Motors.

The manufacturing sector employed 4,006,000 people in 1999, a
substantial increase from 1998 (2,324,000 people). The 1999 figure
indicates a large increase since the 1980s (15.3 percent), but a
phenomenal increase since the early 1970s (169.9 percent). As has
happened in most developed economies, the growing cost of labor has
forced many South Korean manufacturers to relocate large industries
and/or labor-intensive ones to countries with much cheaper wages, such
as Thailand, Malaysia, Indonesia, the Philippines, Vietnam, and China.
Thanks to better ties between the 2 Koreas since 1998, some South Korean
manufacturers have established a few electronics factories in North
Korea, but extensive relocation of South Korean industries to North
Korea will not be a
real option until the 2 countries have further improved their
relations.

CONSTRUCTION.

Despite its decades of growth resulting from massive infrastructure
projects, the construction industry has experienced a decline since 1995
when its share of GDP was 11.3 percent. With the financial crisis, its
share fell to 10.1 percent in 1998 and 8.8 percent in 1999.

In the 1960s and the 1970s, construction prospered as South Korea was
entering its industrialization phase. This continued until the housing
boom of the late 1980s. The number of residences (houses and apartments)
built averaged 196,000 annually from 1973 to 1982 and reached 750,000 in
1990. The boom continued until 1996 when the economic slowdown began.
The 1997 financial crisis saw a sharp drop in construction-industry
revenues from US$32.4 billion in 1997 to US$9.9 billion in 1998. The
limited recovery of 1999 increased the revenues to US$16.7 billion.

Overseas projects have helped the construction industry over time, but
their importance has declined since the early 1990s. Taking advantage of
cheap labor, South Korean construction companies won contracts in the
1980s for road-building projects, mainly in the rich oil-producing
nations of the Middle East.

SERVICES

The service sector has developed substantially over time, accounting for
51.5 percent of GDP in 1999, surpassing agriculture and industry. It is
the largest employer, with 64.3 percent share of total workforce in 1999
(13,906,000 workers), a small increase from 1995.

FINANCIAL AND BUSINESS SERVICES.

These services accounted for 19.7 percent of GDP in 1999, an increase of
5.7 percent since 1989. A major reason for its modest growth was the
collapse of the Daewoo group with more than US$80 billion of unpaid
loans. The collapse damaged the bond market and led to a loss of
confidence in the investment trust industry.

Under the directive of the central bank (Bank of Korea), the
government-owned banks have manipulated economic activities by providing
credits to those enterprises who follow the government's
development strategy, while punishing others by denying them credit. The
1997 crisis forced the government to reform the financial system to
receive an IMF-led rescue package conditioned on economic restructuring.
To minimize its intervention in the financial sector, the government has
privatized all public banks with the exception of 2 development banks:
the Korea Development Bank and the Export-Import Bank of Korea. They
provide medium- and long-term credit for both export industries and the
heavy-equipment and chemical industries funded by the South Korean
government and foreign investors. In compliance with the IMF demand for
the opening of South Korea's financial sector to foreign
competition, it has sold one of its privatized banks to foreign bidders,
while considering the sale of some others. Banks and insurance companies
are still underdeveloped and suffer from various problems, a consequence
of years of government mismanagement and especially the continued tight
government control of financial services. Years of continued reform will
therefore be required to address its underdevelopment.

In January 2001, there were 44 foreign banks doing business in Korea,
and some Korean banks have been taken over by foreign banks. Assets held
by foreign banks are estimated at US$36 billion. Foreign banks work
under regulatory conditions almost identical to those of domestic banks,
but they are exempted from direct control by the South Korean
government. However, they are not allowed to have a branch network, and
therefore their retail operations are small.

Investment trust companies (ITCs) constitute another component of South
Korea's financial and business services sector. The bankruptcy of
the Daewoo group in late 1999 inflicted heavy damage on the ITCs, which
had purchased a large share of its bonds. This drastic event caused
panicked investors to transfer about US$84.2 billion of their
investments from ITCs into banks. To restore confidence, the South
Korean government has injected large sums (US$25.3 billion in 2000) into
the worst-hit ITCs. It has also promised another rescue package of
US$41.3 billion for 2001.

The South Korean life-insurance market is the world's sixth
largest in terms of premium income. The insurance industry has also
suffered from the weaknesses of the financial sector, and some companies
have closed as a result. The government now supervises the insurance
industry, which has been opened to foreign investors. In 2000, the
insurance industry included 23 life-insurance
companies, including 7 foreign ones and 3
joint ventures
, and 13 non-life insurance companies. In 1999, their assets were
estimated at about US$47.2 billion.

TOURISM.

With its ancient historical sites, many Buddhist temples, various
opportunities for summer and winter sports, and natural beauty, South
Korea has become an important tourist attraction. Government support and
private investments have helped the tourist industry grow impressively
in the 1990s, after it had been an insignificant industry in previous
decades. The number of tourists grew on average by 7.2 percent per year
between 1995 and 1999 to reach 3,921,000 in 1999, a large increase over
the 2,294,000 visitors in 1995. In 1999, tourist-generated revenue was
US$4.615 billion, a significant drop from 1998's figure of
US$6.924 billion. The
devaluation
of the South Korean currency and a sharp decline in the price of many
goods and services pushed down the tourist-generated revenues despite an
increase in the number of tourists.

Tourists are mainly from the Pacific region. Japan has been the largest
source of tourism, followed by the United States and Taiwan, with 1999
figures of 2,174,000, 473,000, and 146,000, respectively. South Koreans
residing abroad form a large segment of tourists as well, sending
1,128,000 tourists that year. The tourist industry has a large and
expanding infrastructure. In 1998, it included 446 hotels (nearly half
of them 5-star) with 46,360 hotel rooms. The hotel industry received a
boost in the 1980s with the 1986 Asian Games and the 1988 Summer
Olympics. The 2002 World Cup soccer tournament, which will be co-hosted
by Japan and South Korea, will give another major boost to the South
Korean tourist industry.

TRANSPORTATION.

South Korea's economic growth has contributed to the expansion of
land, sea, and air transportation. The transportation industry grew
significantly in the 1990s when South Korea began to emerge as a major
trading nation. The industry accounted for 7 percent of GDP in 1999, a
little more than its share in 1995 (6.6 percent). The South Korean
marine commercial fleet has a large cargo capacity, (5,093,620 metric
tons in 1999), and is expected to grow in the first decade of the 21st
century. Its commercial air fleet grew rapidly in the 1990s, carrying
74,375,000 international passengers and 9,052,000 domestic ones in 1997.
The slowdown in South Korea's economy in 1998 sharply reduced
passengers to 55,736,000 and 6,877,000, respectively, but a likely
recovery is suggested as the economy recovers.

RETAIL.

South Korea has a very large and growing retail sector, whose share of
GDP in 1999 was 10.9 percent. The retail industry, which had been
dominated mainly by small-scale traditional shops and restaurants, began
to diversify and include larger and modern establishments as well as
various foreign retailing networks in the 1980s. Nevertheless, most
retail units are still small family-run stores, stalls in markets, or
street vendors, though this traditional retail network is giving way
rapidly to large discount stores. Discount-store chains, including the
domestic E-mart, the U.S. Wal-Mart and Price Costco, and the French
Carrefour, are growing. The retail sector also includes a growing food
service sector with estimated revenue of US$22.7 billion in 1999.
Franchise restaurants, including American ones, accounted for about 5
percent of this sector's revenue in 1999. Like all other types of
economic activities, the 1997 financial crisis damaged the retail sector
in general and slowed growth of the franchised restaurants in
particular, but the economic recovery has improved the situation. Retail
and wholesale trade recovered 13 percent in 1999, offsetting a similar
decline in 1998. Partial statistics for 2000 reflect about 6.9 percent
growth of the retail industry and a sharp jump in retail sales of an
estimated US$98 billion.

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